The Gold Economy

Commodity markets are seeing another mixed and lackluster day on Tuesday, with fears surrounding Eurozone debt, the weaker euro and stronger dollar all weighing in. The commitment of the traders report released by the Commodity Futures Trading Commission (CFTC) yesterday, a day late due to the Thanksgiving holiday last week, is also seeing some focus as the week kicks off.

The energy market has been seeing some strength come through in recent sessions on the back of the cold weather spell through the northern hemisphere, leading WTI Nymex crude to top $86/bbl on Monday — and leaving many market players wondering when the gains will stop, with the $100/bbl price tag being mentioned more than once.

Oil is also seeing some price support on the back of potential geopolitical tensions in the Middle East, after reports that Saudi King Abdullah has urged the U.S. to take harsh action to “cut off the head of the snake” of Iran’s nuclear program. Tension is also coming once again from the Niger Delta, with renewed militant activity once again leading to potential supply disruptions. The American Petroleum Institute’s (API) weekly inventory data is due at the normal time after the bell today, and expectations are that it should show a 2.5 million barrels ((mbls)) decline in crude stocks, a 1.5mbls increase in gasoline inventories and a 1mbls increase in middle distillates.

The weekly CFTC report showed that net speculative long positions for Nymex light sweet crude futures fell by around 30,500 contracts for the week ending November 23, to 141,466. This came not only from a 12,800 contract reduction on the long side (down to 317,663), but also from a large addition in short positions, which increased by 17,721 contracts to 176,217. Considered as a percentage of open interest, which itself fell by almost 70,000 contracts in the week to 1,331,203, these moves represented stagnation in long positions at 23.8%, but a more significant increase in shorts (from 11.2% to 13.3%) and a reduction in the net positions (from 12.3% to 10.6%).

This can been seen as a more fundamental shift in speculation than has been seen in recent weeks, with the move seeming to indicate that some selling pressure may be in the cards. Couple this with the fact that none of these levels are near record highs, and it is unlikely they will see a correction at this stage to compensate for oversold positions, meaning the moves over the next few weeks are likely to follow the speculative direction if it continues.

Although the precious metals complex has been seeing rather neutral trade for the most part today, spot gold (denominated by euros) did manage to touch a new record high at €1,052/oz, as safe haven demand in Europe particularly drove prices. Traders also reported some renewed interest in both gold and silver coming from the fund arena in recent sessions. And on an interesting note, the Securities Regulatory Commission in China has granted approval for the first gold-based fund in the country, the Lion Global Gold Fund, which will be investing in foreign physical-gold backed ETFs, and should make it easier for Chinese players to invest in the gold market.

The CFTC report showed that little significant happened to positions for gold in the week ending November 23, as traders were generally holding on to positions as the slow Thanksgiving week began. A similar pattern was seen for Comex silver futures during the week, although unlike gold, a slight move to the upside was registered, with speculative short positions falling around 2,300 contracts in the week to 9,881.

In the base metals complex, iron ore is seeing a lot of attention today, as speculation begins that the next round of contract negotiations will see prices rise around 4% in Q1 2011, compared with Q4 2010, in line with the spot rate moves during the period. High steel prices and the ongoing reduction in exports from India have the market expecting ongoing fundamental tightness, with offers for imported iron ore in China last night around $170/tn.

Elsewhere in the base complex, zinc and lead have been managing to squeeze out some decent gains during the past few sessions, while the majority of the other industrious metals remain steady. The CFTC report showed that the decline in copper prices during the reporting week can be seen coming from a 4,000 contract liquidation in speculative long positions — the second net liquidation in two weeks, taking the total number of long positions to levels seen in September at 46,097.

In the agricultural complex, U.S. agricultural price data released later today will take focus, and with the SU corn/soybean harvest now over, some stability in confidence has returned as supply shocks will no longer be forthcoming for those sectors. According to the U.S. Department of Agriculture, the winter wheat crop is still not as robust, with only 47% of plants currently categorised as “good” and “very good,” compared to 63% last year.

Disclosure: No positions.